2 Types of Businesses and Why You Should Buy Both

Canada Goose Holdings Inc. (TSX:GOOS)(NYSE:GOOS) and Dollarama Inc. (TSX:DOL) aim for opposite extremes of the wealth curve. Investors should consider both.

| More on:
Dollar symbol and Canadian flag on keyboard

Image source: Getty Images

“There are two kinds of companies,” Jeff Bezos once said, “those that work to try to charge more and those that work to charge less.”

It’s a simple fact that’s easy to overlook but deserves more attention from investors. Great companies are high performers that take a business model and push it to the extreme. Either the focus is on higher margins and better branding or on superhuman efficiency and cost savings. Both strategies result in hefty profits.

That’s why the richest people in the world own companies that fall into one of these two categories. In fact, the world’s two richest people, Bernard Arnault and Jeff Bezos, made their fortunes on either side of this spectrum. Arnault is a master of luxury branding while Bezos is the undisputed champion of efficiency and low costs.

I believe savvy investors should mix the two strategies in their portfolio to balance long-term performance. Regardless of the macroeconomic situation or business debt cycle, companies on either side of the cost spectrum will continue to have steady returns. Here are two Canadian examples to make my point.

Canada Goose

Winter wear manufacturer Canada Goose Holdings (TSX:GOOS)(NYSE:GOOS) is probably the most popular luxury brand in Canada at the moment. The company’s 25% gross margins on its products puts it in the same league as luxury perfume and handbag sellers from across the world.

Meanwhile, demand in China is a clear indication of a luxury brand’s appeal. When Canada Goose launched its first flagship store in Beijing late last year, eager consumers lined up across the street waiting for the store to open. That’s yet another sign that Goose has established itself as a premium manufacturer.

The exclusivity of the brand ultimately translates to above-average profits and better returns for shareholders. Goose is on track to expand further in China and take its brand to other international destinations, which means its double-digit growth rate can be sustained for the foreseeable future.

After a quarter of heavy selling pressure, I believe the stock might finally be fairly priced.

Dollarama

On the other end of the cost spectrum is bargain retailer Dollarama (TSX:DOL). Sales growth and profit margins were squeezed over the past 12 months, but the company is making a swift comeback this year.

The stock is up a jaw-dropping 53% year to date. Meanwhile, the net profit margin is stable at 12%, and the company reported a surprising 5.8% jump in comparable store sales in its most recent quarter. In other words, Dollarama is flying high.

This month, the company also took a majority stake in Latin American value retailer Dollarcity, another rapidly expanding brand. The acquisition of this stake indicates that Dollarama is focused on international expansion for the next leg of its growth cycle.

The company’s stock currently trades for just 22 times forward earnings and four times sales. Considering its track record and scale, I believe the stock is fairly valued for long-term investors.

Bottom line

Success in business comes from picking and executing one of two strategies — high-margin luxury or high-volume discounting. Companies like Dollarama and Canada Goose are great examples of how firms can outperform and outmaneuver the competition by focusing on their core strategy.

I believe savvy, long-term investors seeking stable returns should probably add a combination of both strategies to drive portfolio performance.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned. 

More on Stocks for Beginners

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

edit Sale sign, value, discount
Stocks for Beginners

These 3 Growth Stocks Are on Sale and Set to Surge

Some growth stocks are on sale right now that offer massive long-term potential for investors. Here's a trio to consider…

Read more »

Plane on runway, aircraft
Stocks for Beginners

Up 53% From its 52-Week Low, Is Cargojet Stock Still a Buy?

Cargojet (TSX:CJT) stock is up a whopping 53%, nearing closer to 52-week highs from 52-week lows, so what's next for…

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »